Economic Principles of Payment Reform
Council of State Governments
Eastern Regional Conference
4 August 2009
Doug Emery, MS
Operations Manager,
Prometheus / Bridges To Excellence
About PROMETHEUS Payment
 Not for profit with independent BOD made up of
employers, plans, providers, health care services
experts
 Funded in 2006 by CMWF to develop and model
Evidence-informed Case Rates
 Funded in 2007 by RWJF to develop implementation
plan
 Funded in 2008 by RWJF to support pilot
implementations
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President Obama on Payment Reform to
the AMA
…starts with reforming the way we compensate our
doctors and hospitals. We need to bundle payments
so you aren’t paid for every single treatment you offer
a patient with a chronic condition like diabetes, but
instead are paid for how you treat the overall disease.
We need to create incentives for physicians to team
up – because we know that when that happens, it
results in a healthier patient. We need to give doctors
bonuses for good health outcomes – so that we are
not promoting just more treatment, but better care.
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Original Picture (circa 1985-1995)
Orthodox, Closed-System Ideology of Managed Care
Managed Care Penetration
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5

HMO < 5%

HMO 5-15%

HMO 15-25%

HMO 25-40%

HMO>40%

Discount FFS

Deep Discounts

Capitation Grows

Capitation

Capitation

Little Employer
Pressure

Capitation Starts


Coalitions


Solo/IPAs

Some Coalitions
Increasing
Employer
Pressure


Independent
Hospitals

IPAs/CWOW
Large Medical
Groups

Hospitals
Form/Join
Systems
MSOs / Practice
Acquisitions
Value-based
purchasing
Equity/Staff
Models

Linked Physician
Groups

Hospital Mergers

2-3 Dominant
Regional
Networks
ProviderSponsored
HMOs/PSO

2-3 Dominant
Integrated Health
Networks

Specialists
Rule

Profit 6-10%

PHOs

Profit 2-3%

PCP Nets


•Vertically Integrated HMO/IDS Triumph
•Near Universal Capitation
•Ecstatic
Consumers
TM
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Errant Prophesy: Just How Wrong Were They?
“By 2005, every major metropolitan area in the country will
be dominated by a few integrated provider networks holding
direct capitated contracts with individuals, corporations and
government.”
Source: Hamilton/KSA Health Care Consultants
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Managed Care Orthodoxy
The economic philosophy that health insurance can
be integrated with health care; once integrated,
organizations can compete on the basis of price
and quality
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Paul Ellwood (Interview with Managed Care
magazine, November, 1997):
“We coined the term HMO for the Nixon
Administration as a way of describing an
organization that would compete on the basis of
price and quality that would combine insurance
and health care in a single organization. That
happened in 1970.”
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Single Market Myth:
When we purchase health insurance, we
purchase health care
But
There actually two markets:
 Ex Ante Market for Health Insurance
 Ex Post Market for Health Services Delivery
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Economic Distortions of Orthodox Risk
Theory
• 1) “risk” is unidimensional; therefore
• 2) “risk” can be shifted or integrated (i.e., health
insurance can be efficiently alloyed with health
care); therefore;
• 3) “integrated risk” can be efficiently sold in one
marketplace (i.e., HMOs competing on the basis
of price and quality, or capitated providers
competing for HMO business)
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#1 Probability Risk
Probability risk is defined as the risk associated with
pricing future, unresolved states of medical demand
Other names: insurance risk, actuarial risk,
population risk and risk of occurrence
Probability risk is sold in the ex ante market or
health insurance market
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#2 Technical Risk
• Technical risk is defined as the risk associated with globally pricing
integrated episodes of care.
• An episode of care is defined as: “The complete, self-contained
sequence of medical interactions between a patient and provider(s) of
healthcare services in pursuit of a defined clinical objective over a
specified period of time.”
Source: Global Fees for Episodes of Care: New Approaches to Healthcare Financing Douglas W. Emery, McGraw-Hill
1999
• Hornbrook et al., 1985: “A health episode is a higher-order concept
that deals with all the reasons for contact with the healthcare system.”
Source: “Health Care Episodes: Definition, Measurement and Use” Medical Care Review Fall 1985”
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Global Fees or Case Rates
• Global fees (case rates) are the economic means of
allocating technical risk along the production function of
care and pricing discrete healthcare products
• Two kinds of global fees and case rates:
1) Integrated
2) Virtual
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Orthodox Compression Wedge
Source: Global Fees
for Episodes of Care: New Approaches to Healthcare Financing Douglas W. Emery, McGraw-Hill 1999
Ex Ante
Total set of insurable lives
Ex Post
Total set of available providers
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Insured lives
Premium base
Master policy
Risk Conflation
Patience choice
Physician choice
Market
(Employers, self-employed,
government, etc.)
Market
(Doctors, nurses, therapists, extenders, etc.)
Four Cardinal “Pressure Points” of the
Health Care Public Square
1) Patient Choice/Access Compression (selective contracting,
gatekeeping,etc.)
2) Physician Choice Compression (preauthorizations, utilization
review, protocols, etc.)
3) Price Compression (through such leveraging methods as discounts,
the RBRVS and capitation)
4) Fiduciary Role Compression (the fiduciary role of insurance
conflated with the fiduciary role of Hippocratic Oath; specialists’ roles
compressed into generalists’ roles)
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Evidence of Market Coercion
1)
2)
3)
4)
patient discontent
physician discontent
orthodox managed care
failures
state and court intervention
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Risk bifurcation in the PROMETHEUS
model
Total Cost of
Care
Reliabl
e Care
Costs of all Diabetes
Episodes
Costs of all Typical
Episodes
Costs of all
Base
Services
Costs of all
Severity
Adjusters
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Costs of all Potentially
Avoidable Complications
Insurer – Probability risk
Provider – Technical risk
Consumer – Probability risk
Evidence
-informed
Case
Rate
The High Cost of FFS Care
• All diabetes-related
inpatient stays
• All professional services
during stays
• All claims with “PAC”
diagnosis codes
• All claims with “PAC”
procedure codes
• Drugs used to treat PACs
Potentially
Avoidable
Complications:
$813 million
Diabetes
Relevant
Services
$1.32 billion
Medical
$595 Million
•Pharmacy
•$732 Million
Medical
$488 Million
Typical
claims and
services:
$515 million
Medical
$108 Million
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Pharmacy
$325 Million
• Claims that do not have
a “PAC” code
•Pharmacy
•$407 Million
Results of Diabetes Model
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Regional Variation: Typical and PAC costs
State Level Average Episode Cost --- CHF
state_pac_ave
state_typical_ave
state_relevant_ave
50000
45000
40000
Average Cost ($)
35000
30000
25000
20000
15000
10000
5000
MT
SD
MD
NM
ID
WI
MN
WA
HI
DC
OR
DE
VT
NY
WY
MA
IL
IA
UT
ME
TX
KS
ND
KY
AL
WV
MI
LA
AZ
CO
FL
NH
SC
AR
OK
NV
IN
OH
AK
CT
NJ
RI
VA
MO
NC
PA
TN
MS
GA
CA
NE
0
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